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Activity$-$Based Supplier Costing

Noguchi Company manufactures cooling systems. Noguchi produces all the parts necessary for its product except for one electronic component, which is purchased from two local suppliers: Manzer Inc. and Buckner Company. Both suppliers are reliable and seldom deliver late; however, Manzer sells the component for $$89$ per unit, while Buckner sells the same component for $$86.$ Noguchi purchases $80\%$ of its components from Buckner because of its lower price. The total annual demand is $4,000,000$ components.

To help assess the cost effect of the two components, the following data were collected for supplier$-$related activities and suppliers:

I. Activity Data

Line Item Description Activity Cost

Inspecting components $($sampling only$)$ $$575,000$

Reworking products $($due to failed component$)8,470,000$

Warranty work $($due to failed component$)11,670,000$

II$.$ Supplier Data

Line Item Description Manzer Inc. Buckner Company

Unit purchase price $$89$ $$86$

Units purchased $800,0003,200,000$

Sampling hours$*803,920$

Rework hours $3605,640$

Warranty hours $80015,200$

$*$ Sampling inspection for Manzer's product has been reduced because the reject rate is so low.

Required:

$1.$ Calculate the cost per component for each supplier, taking into consideration the costs of the supplier$-$related activities and using the current prices and sales volume. $($Note: Round the intermediate calculations to the whole number for the following activity rates: "Reworking products" and "Warranty work". Round the unit cost to two decimal places.$)$

Line Item Description Cost

Manzer Inc. $fill in the blank $1$

per unit

Buckner Company $fill in the blank $2$

per unit

$2$a$.$ Suppose that Noguchi loses $$3,696,000$ in sales per year because it develops a poor reputation due to defective units attributable to failed components. Using warranty hours, assign the cost of lost sales to each supplier.

Line Item Description Cost

Manzer $fill in the blank $3$

Buckner $fill in the blank $4$

$2$b$.$ By how much would this change the cost of each supplier's component? Round your answers to the nearest cent.

Line Item Description Change Cost

Manzer

$fill in the blank $6$

Buckner

$fill in the blank $8$

$3.$ Based on the analysis in Requirements $1$ and $2,$ discuss the importance of activity$-$based supplier costing for internal decision making.

As with product costing, accurate assignment of costs to the cost object is essential for well$-$grounded decision$-$making. Suppliers can cause a firm to perform costly activities such as inspection, rework, and warranty work. The fill in the blank $1$ of $3$

of a component is thus more than its purchase price. As this example shows, the component with the fill in the blank $2$ of $3$

price is actually less expensive because it causes less demand on internal costly activities. Thus, the company would likely fill in the blank $3$ of $3$

the purchases of one supplier in favor of the other. It also might attempt to work with the one supplier which is causing significant demands on internal activities to see if the quality of its component can be increased.

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